TMI Blog2014 (10) TMI 618X X X X Extracts X X X X X X X X Extracts X X X X ..... cle 8(1) of the DTAA. The material filed by the assessee clearly shows that the vessel M.V. Thekkadi was operated between Tuticorin Port to Mali Port in Maldives. Therefore, it operates in international traffic/waters – the distinction made by the CIT(A) between the charter hire and time charter is unwarranted - Since the material filed by the assessee discloses that the vessels were operated between India and Maldives in the international traffic, merely because there was a clause that the vessel would be delivered at Tuticorin Cochin Range after the expiry of the charter period in the agreement, that cannot justify for application of Explanation 5(c) to section 9(1)(vi) of the Act. The CIT(A) placed reliance on the Explanation 5 to section 9 of Indian Income-tax Act - Since the DTAA between Government of India and Government of UAE, is more beneficial to the assessee, the provisions of section 9(1)(vi) Explanation 5 is not applicable – the order of the lower authorities is to be set aside – Decided in favour of assessee. - ITA No. 39/Coch/2014 - - - Dated:- 21-10-2014 - Shri N.R.S. Ganesan (JM) and Shri Chandra Poojari (AM),JJ. For the Appellant : Shri K. P. Paulson ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated as business income, therefore, it cannot be treated as royalty. According to the ld.representative, the NRI had no permanent establishment in India, therefore, no income accrued to the NRI in India on the payment of hire charges for the charter of vessel for operating the same in international water. According to the ld.representative, the provisions of section 195 would apply only in case the payment was received or deemed to be received in India. In this case, the payment was not received in India and not deemed to be received in India. Therefore, according to the ld.representative, the assessing officer is not justified in disallowing the claim of the assessee. 4. The ld.representative further submitted that DTAA between the two sovereign countries would override the provisions of Indian Income-tax Act insofar as it is more beneficial to the assessee. According to the ld.representative, Article 8 of the DTAA clearly says that the profit derived by an enterprise of a contracting state from the operation of ships in international water shall be taxable only in that state. Therefore, in view of the specific clause in the DTAA, more particularly, Article 8, the income rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or giving preferential treatment to the DTAA. Since the payment received by NRI is not taxable in India in view of the DTAA, according to the ld.representative, the assessee is not liable to deduct tax, therefore, the provisions of section 195 / 194J is not applicable in the present case. The ld.representative placed his reliance on the decision of the Mumbai Bench of this Tribunal in Essar Oil Ltd vs DCIT (2006) 102 TTJ (Mum) 61. 7. The other part of the issue pertains to non deduction of tax from audit fee to the extent of ₹ 50,508. The ld.representative submitted that he is not pressing this issue. The ld.representative has made an endorsement to that effect on the file. 8. On the contrary, Shri M Anil Kumar, the ld.DR submitted that the assessee has paid an amount of ₹ 36,92,214 for charter hire of ships to M/s Lots International Ltd, a company incorporated in UAE. According to the ld.DR, the charter hire was paid @USD 725 per day. According to the ld.DR, the assessee a shipping agent, used to take the ships on charter hire and used the same for its business at their convenience. Referring to section 9(1)(vi) of the Income-tax Act, the ld.DR submitted that any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee to the extent of ₹ 36,92,214. The ld.DR relied on the following judgments: (1) Kanchangaga Sea Foods Ltd vs CIT (2004) 136 Taxman 8 (P) (2) Poompuhar Shippinbg Corportion Ltd vs ITO, Intl Taxation (2013) 38 taxmann.com 150 (Mad) 10. We have carefully gone through the materials available on record and given our thoughtful consideration to the arguments advanced on both sides. The assessee, admittedly, entered into an agreement with Lots International Ltd, a company incorporated in Dubai, UAE for time charter of a vessel by name, M.V. Thekkadi. The copy of the charter agreement dated 07-05-2005 and 03-08-2005 are available on pages 25 to 33 and 34 to 43 of the paper book. As per this agreement, the owner of the ship is Lots International, Dubai. The assessee took the vessel, M.V. Thekkadi on charter for a period of three months. It is not in dispute that the assessee is a shipping agent. The assessee obtained goods from various persons for transporting the same to Maldives. As per clause 20 of the Charter agreement, the hire charges / payment has to be made in US dollar to Emeritus Bank International, Mankhool, Dubai, United Arab Emirates, Swift Code - EBILAEAD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y a non-resident manufacturer along with computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India. Explanation 1.- For the purposes of the first proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date; so, however, that, where the recipient of the income by way of royalty is a foreign company, the agreement shall not be deemed to have been made before that date unless, before the expiry of the time allowed under sub-section (1) or sub-section (2) of section 139 (whether fixed originally or on extension) for furnishing the return of income for the assessment year commencing on the 1st day of April, 1977, or the assessment year in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company exercises an option by furnishing a declaration in writing to the Assessing Officer (such option being final for that assessment year and for every ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vereign countries, viz. Government of India and Government of UAE. The copy of the agreement is filed by the assessee in the paper book. The DTAA between the two countries defines royalty as per Article 12 therein. For the purpose of convenience, we are reproducing Article 12 of the DTAA: Article 12 ROYALTIES 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed 10 per cent of the gross amount of such royalties. 3. The term royalties s used in this Article means payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for informati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat enterprise of ships in international traffic shall be taxable only in that State. 2. For the purposes of this Article, profits from the operation of ships in international traffic shall mean profits derived by an enterprise described in paragraph 1 from the transportation by sea of passengers, mail, livestock or goods and shall include: a. The charter or rental of ships incidental to such transportation; b. The rental of containers and related equipments used in connection with the operation of ships in international traffic; c. The gains derived from the alienation of ships, containers and related equipments owned and operated by the enterprise in international traffic. 3. For the purposes of this Article, interest on funds connected with the operation of ships in international traffic shall be regarded s profits derived from the operation of such ships and the provisions of Article 11 shall not apply in relation to such interest. 4. The provisions of paragraphs 1, 2 and 3 shall apply to profits from the participation in a pool, a joint business or an international operating agency. From the above, it could be seen that the profit derived from an enterpri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is bench of the Tribunal in ACIT vs Kinship Services (India) Pvt Ltd (2010) 128 TTJ 108 had an occasion to consider an identical issue. This Tribunal found that charter hire payments by the assessee company to non resident company are not a royalty, therefore, not taxable in India;hence, the assessee is not required to deduct tax. In fact, the Tribunal observed as follows at page 114 115: 14. The assessing authority has treated the payments made by the assessee-company under the category of royalty. Royalty means consideration for the transfer of all or any rights in respect of a patent, invention, model, design, secret formula or processes or trade mark or similar property. A plain reading makes it clear that the charter ship hire payments made by the assessee do not fall under the above category. The royalty also means consideration for imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property. The payments made by the assessee do not have any of these characteristics, design, secret formula or process or trade mark or similar property. The payments made by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause that the vessel would be delivered at Tuticorin Cochin Range after the expiry of the charter period in the agreement, that cannot justify for application of Explanation 5(c) to section 9(1)(vi) of the Act. The CIT(A) placed reliance on the Explanation 5 to section 9 of Indian Income-tax Act. Since the DTAA between Government of India and Government of UAE, is more beneficial to the assessee, this Tribunal is of the considered opinion that the provisions of section 9(1)(vi) Explanation 5 is not applicable to the facts of the case. 18. We have also carefully gone through the decision of the Andhra Pradesh High Court in Kanchangaga Sea Foods Ltd (supra). In the case before the Andhra Pradesh High Court, the assessee company was engaged in sale and export of seafoods. In order to exploit the fishing rights in Exclusive Economic Zone of India, the assessee entered into an agreement chartering two fishing vessels with a non resident company. As per the agreement, the assessee ought to pay 85 per cent of fish catch to non resident company towards payment of hire charges. The assessing officer found that the payment was made by the assessee to the non resident company as profit as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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